The Market Is Reaching Its Limits

Mark Leibovit, chief market strategist for VRTrader.com, says the trends are bullish for now, but he thinks a major test is coming soon.

Most indexes are now just a fraction of a percent away from resistance at the mid-June and early-August highs. All the bulls need is just one rally. But if the market fails to break through, we could have a triple top and head back down to the lower end of the recent trading range.

And the bears have their own accomplishments to be proud of. Small caps have underperformed, defensive stocks have led this advance, [and] the rally has been on low and declining volume.

In fact, [the Dow Jones Industrial Average] posted a Positive Volume Reversal [while the Dow Jones Transportation Average] posted a Negative Volume Reversal at the same time. This market is clearly schizophrenic. (A volume reversal is a proprietary tool developed by Mark Leibovit to signal major changes in direction for stocks and indexes—Editor.)

I believe we're following the pattern of a setting up a huge bull trap here in September, followed by a potentially severe washout either the second half of the month or in October. However, [the recent] Positive Volume Reversal (tm) in the Dow Industrials and recent strength in the Nasdaq 100, the bulls are still in charge.

If indeed we're going to experience a decent correction, which heretofore has been elusive, we're going to have to see broad-based selling in the major indexes.

Technology [has] continued to outperform. This is normally bullish for the market, as tech has historically been a market leader. The other [recent] market leader was materials, one of the top- performing sectors of late, but [that] is almost entirely due to rallies in gold and silver as traders protect themselves from ever-increasing levels of government debt and fears of a stalling or even declining economy.

Commentators, especially the “feel-good, be-happy” crowd at the financial networks, along with traders are getting real comfortable with this rally. In my opinion, yes, the market could trade higher, but they are playing with fire and will likely get caught in one heck of a bull trap.

If I had to create an ideal trading situation putting together cyclical and historical work along with technical and sentiment studies, I would conclude the following: The market should see another sharp sell-off some time between now and mid-October, triggered by some sort of “outlier” event. In other words, when it occurs, the bulls will be caught with their suspenders down. Following that sell-off, we could then experience a sharp year-end, pre-election, and/or Turkey/Santa Claus rally which I would have to monitor carefully. After that, a reality check hits and the market again nosedives.

[But for now,] with [the recent] Positive Volume Reversal in the Dow Industrials and strength in the Nasdaq 100, the bulls are still in charge.